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Politics : Ask Michael Burke

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To: Mike M2 who wrote (83647)	9/22/2000 9:43:09 PM
From: Thomas M.	Read Replies (1) of 132070

from the Prudent Bear: As banking analyst Charles Peabody of Mitchell Securities pointed out recently, regulators are now expressing particular concern with respect to one major by-product of the new economy that has found its way into the lending practices of the banking community: “enterprise value” lending, in which many new economy telecommunications stocks are ascribed outlandish “enterprise values” by the banks when the latter are making collateral calculations for the purposes of lending. As Peabody notes, “the assumption by many bankers was that, if fundamental troubles arose [in the new economy TMT stocks], the bank debt could be paid down by realizing the ‘enterprise values’ in the public markets.” But a number of start-up telecommunication companies have run into fundamental troubles recently, thereby inducing these very same public markets to mark down the franchise valuations, and rendering the collateral against the loans more suspect. If this sort of experience becomes more pervasive, Peabody rightly warns: “Investors can be assured of the fact that regulators (who have already expressed concern about ‘franchise value’ lending) will demand that higher loan loss reserves be allocated to such credits.” More stringency on the part of the regulators would go someway to undermining the comparative monetary laxity now established by the Fed.

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